Apr 30th
- 1. 1 of 4 Market Pulse Investment Weekly Week 19 | May 2015 US GDP: it’s not all bad news Greeks find a way to reset negotiations Euro bounce impacts cyclical stocks Goodbody Wealth Management Bernard Swords Chief Investment Officer T +353 1 667 0400 E [email protected]
- 2. 2 of 4 DateInvestment Weekly Market Pulse US GDP changes rate outlook There were some sharp reversals in financial markets last week. The release of disappointing Q1 GDP numbers from the US were the main talking point, but investors also had the minutes of the April Federal Open Market Committee (FOMC) meeting to chew over. The GDP release was weak with growth of just 0.2% at an annualised rate in the first quarter of the year against expectations of 1%. Some transitory influences - bad winter weather and longshoreman strikes in Pacific ports - depressed exports. But, even allowing for these, the quarter was a weak one. View The release supports our fears that the US economy has been losing momentum and that we could have a growth scare. There is nothing in the release to suggest that the economy is heading back towards recession, however. Remember: the US economy contracted by more than 2% in the first quarter of last year, but ended up growing by 2.4% for the full year. It does push out the potential date for a rise in interest rates, although the Fed did not acknowledge this in its recent minutes. A chink of light in Greece The protracted negotiations in Greece may have moved in the right direction over the last week. The Greek government does seem to be making some changes that could show a way forward. Firstly, Greek finance minister Yanis Varoufakis was dumped as lead negotiator in favour of the less extreme Euclid Tsakalotos, the deputy foreign minister. The change should allow participants to reset some of their positions in the negotiation process. Secondly, prime minister Alexis Tsipras has indicated he favours a referendum rather than fresh elections should an agreement prove politically too onerous. This allows the government to accept an agreement subject to popular acceptance. View The week’s developments give further credence to the notion that Greece and the troika will muddle through. Opinion polls in Greece are firmly in favour of remaining within the euro area. The referendum idea allows a face saving way out for the Greek government. The question is whether time will permit. The euro area negotiators are sceptical that a referendum can be held in time, but it is good to see that the Greeks are looking at mechanisms that allow them to sign an agreement. Action We still feel that lower growth is a mixed blessing for US assets, but overall it should be supportive. The negative impact of the lower growth expectations will be more than compensated for by the delay in interest rate increases. The US dollar has started to weaken and we expect this to continue in the short term. Action The protracted nature of the Greek negotiations have weighed on euro area assets. A resolution would give the euro a boost and help peripheral bonds. For the equity market, the reduced uncertainty will help, but a stronger euro will temper gains. Market performance Current Prior MTD YTD FT World (local) 273.68 -0.9% 0.9% 6.8% FT World (euros) 298.66 -3.2% 1.0% 14.2% Iseq 6144.42 -2.3% 1.6% 17.6% FT 100 7043.74 0.0% 1.2% 7.3% Euro Stoxx 376.81 -0.9% 1.4% 17.9% S&P500 2114.49 -0.2% 1.4% 2.7% Oil Brent 66.77 2.3% 0.0% 16.0% Market performance Current Prior Year end Bond markets (10 year yields) Euro area 0.42 0.18 0.14 UK 1.88 1.59 1.64 US 2.13 1.89 1.91 Currencies Dollar/euro 1.110 1.093 1.08 Sterling/euro 0.734 0.734 0.72 Source: Bloomberg Week 19 | May 2015 +=
- 3. 3 of 4 DateInvestment Weekly Market Pulse Evolving Theme US economy hits a soft patch The main drags on US GDP growth in the first quarter were exports and capital investment. Exports declined 7.2%. Some of this was due to strikes the Pacific ports strike, but some must also be due to the recent strength in the US dollar. Overall net trade took 1.3% off the growth rate, but there should be some rebound in Q2 as the strikes have now ended. The weakness in capital investment was concentrated in the extractive industries (primarily oil), where it fell down 43%, reducing GDP growth by 0.8%. With the oil price stabilising there is a chance that capital investment will also stabilise and thus will not be as big a drag in the second quarter. Consumption growth slowed to 1.9% from over 4% in Q4 2014. However, part of this was due to weak motor demand in the weather-beaten months of January and February. There was a sizeable recovery in March as weather returned to more normal patterns. It does look like there is a good chance that in Q2 consumption growth will improve and return towards 3% in the later quarters. There is likely to be continued uncertainty over whether we are witnessing a soft patch in the US economy or whether this blip will turn out to be a longer term deceleration in the economy. We believe that it is a soft patch, as we have not seen any major weakness in the labour market. But the uncertainty should mean that a rate hike before Q4 looks unlikely. Week 19 | May 2015 Exchange Rate Source: Bloomberg US Consumer Source: Factset 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 50.0 60.0 70.0 80.0 90.0 100.0 110.0 29/04/2011 29/02/2012 31/12/2012 31/10/2013 29/08/2014 Consumer Sentiment Retail Sales YoY grth. (RHS) Excluding Motors US Consumption continue to recover 1.00 1.05 1.10 1.15 1.20 1.25 02/01/2015 02/02/2015 02/03/2015 02/04/2015 Dollar Euro Euro bouncing 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 50.0 60.0 70.0 80.0 90.0 100.0 110.0 29/04/2011 29/02/2012 31/12/2012 31/10/2013 29/08/2014 Consumer Sentiment Retail Sales YoY grth. (RHS) Excluding Motors US Consumption continue to recover Sector Strategy Cyclicals turn from overseas to domestic Since the start of the year the trend in the currency markets has been for the euro to weaken and the US dollar to strengthen. The combination of a weaker euro and better economic figures from the euro area has pushed cyclicals with overseas earnings, such as motors, to the top of the sector performances. Over the last week the euro has rebounded almost 5% against the US dollar and this is beginning to impact sector performances. We have just seen the export heavy motor sector in Europe beginning to lag the rest of the euro area and it is likely that this trend will continue. So in the short term we expect the focus to move to euro area cyclicals with domestic exposure. There are two major sectors that fit this requirement. The banking sector generates the bulk of its income from the euro area and is sensitive to economic growth within the region. The performance of the sector has been held back by investors’ focus on companies with non-euro earnings and the protracted negotiations in Greece. We believe both of these concerns will recede over the next few weeks and that we will start to see stronger performance from the sector. The French bank BNP is our first choice, but we also like the iShares Euro Stoxx Banks ETF. Construction is the other sector which should benefit from the change in sector trends. A stronger euro area economy will ease fiscal pressures across the region and thus allow governments to look at increases in capital spending again. QE will keep interest rates lower for longer, which will underpin property markets and prompt further new building. Our favoured companies here are CRH and Kingspan. CRH has the added benefit of integrating its newly acquired assets from the Holcim/Lafarge deals. Hence, it should get extra profit growth beyond what the economic momentum will deliver.
- 4. 4 of 4 Dublin Ballsbridge Park, Ballsbridge, Dublin 4 T +353 1 667 0400 Cork City Quarter, Lapps Quay, Cork T +353 21 427 9266 Galway 19 Eyre Square, Galway T +353 91 569 744 Kerry 13 Denny Street, Tralee T +353 66 710 2752 www.goodbody.ie Wealth Management | Corporate Finance | Capital Markets Prepared by Bernard Swords, Chief Investment Officer The named author does not hold a position in any of the listed stocks Produced on 5 May 2015 Disclaimer This publication has been approved by Goodbody Stockbrokers. The information has been taken from sources we believe to be reliable, we do not guarantee their accuracy or completeness and any such information may be incomplete or condensed. All opinions and estimates constitute best judgement at the time of publication and are subject to change without notice. The information, tools and material presented in this document are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities. This document is not to be relied upon in substitution for the exercise of independent judgement. Nothing in this publication constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Goodbody Stockbrokers does not advise on the tax consequences of investments and you are advised to contact an independent tax advisor. Please note in particular that the basis and levels of taxation may change without notice. Private customers having access to this document, should not act upon it in anyway but should consult with their independent professional advisors. The price, value and income of certain investments may rise or may be subject to sudden and large falls in value. You may not recover the total amount originally invested. Past performance should not be taken as an indication or guarantee of future performance; neither should simulated performance. The value of securities may be subject to exchange rate fluctuations that may have a positive or adverse effect on the price or income of such securities. Goodbody Stockbrokers and its associated companies and/or its officers may from time to time perform banking or Corporate Finance services including underwriting, managing or advising on a public offering for, or solicit business from any company recommended in this document. They may own or have positions in any securities mentioned herein and may from time to time deal in such securities. Goodbody Stockbrokers is a registered Market Maker to each of the Companies listed on the Irish Stock Exchange. Protection of investors under the UK Financial Services and Markets Act may not apply. Irish Investor Compensation arrangements will apply. For US Persons Only: This publication is only intended for use in the United States by Major Institutional Investors. A Major Institutional Investor is defined under Rule 15a-6 of the Securities Exchange Act 1934 as amended and interpreted by the SEC from time-to-time as having total assets in its own account or under management in excess of $100 million. All material presented in this publication, unless specifically indicated otherwise is copyright to Goodbody Stockbrokers. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Goodbody Stockbrokers. Registered Office: Ballsbridge Park, Ballsbridge Dublin 4, Ireland. T: +353 1 667 0400. Registered in Ireland No. 54223. Goodbody Stockbrokers acts as broker to: AIB, Datalex, FBD, First Derivatives, Grafton Group, Greencore, Hibernia REIT, Irish Continental Group, Kingspan, NTR, Origin Enterprises, Paddy Power, United Drug and UTV Media. Goodbody Stockbrokers, trading as Goodbody, is regulated by the Central Bank of Ireland. Goodbody is a member of the Irish Stock Exchange and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. 000610_W1915 Goodbody Investment Weekly